Lucent, Alcatel Discussing $33 Billion Merger
LONDON (Dow Jones) -- Lucent Technologies and Alcatel are in advanced discussions about a US$33 billion merger that could signal the start of a new wave of consolidation in the telecommunications-equipment industry.
The companies, which broke off previous tie-up talks in 2001, said Thursday night they're discussing a "merger of equals" that would be priced at market, meaning with no premium on their stock prices.
Tying the knot with Lucent would allow Alcatel, which is Europe's second-largest telecom-gear maker, to expand its presence in the U.S. market.
Alcatel's Paris-listedshares climbed 1.8%, off earlier highs, in Friday trading. Lucent shares were up nearly 10% in Frankfurt.
Details of any such deal remain unclear, including just how the two companies might pull off a "merger of equals" with such divergent valuations. Lucent has a market value of $12.6 billion, while Alcatel's market capitalization is $20.2 billion.
"From a technology perspective, Alcatel is in a stronger position than Lucent," said Jean-Charles Doineau, an analyst with U.K.-based telecoms consultancy Ovum.
"It is a leader in products such as DSL and WCMDA, which are very much in demand at the moment. Lucent, however, has a strong relationship with the former Bells. To Alcatel, Lucent represents an open door to the big U.S. service providers."
A deal, however, could be complicated by growing protectionist sentiments in the U.S. and Europe.
It's the second time around for the firms.
In the spring of 2001, they were on the verge of a $23.5 billion merger when the talks fell through because of a disagreement over how much control Alcatel would yield.
This time around, Lucent Chief Executive Patricia Russo would be CEO of the combined company, and the firms would have equal representation on a new board of directors, the Wall Street Journal reported.
Given the history, some analysts believe much effort should go into insuring a management structure that would satisfy both players.
"From a management perspective, there are political issues. The best way to do it might be to adopt the EADS approach with dual French and German management through co-CEOs," Doineau said.
"That could really make sense because Lucent runs Bell Labs, which contributes to the ministry of defense, so the U.S. needs to keep some control. Disagreement over how much is the main reason the merger fell through in 2001," he added.
The companies said in a joint statement there could be no assurance that an agreement would be reached. They said no further comment would be provided until an agreement is reached or the talks are terminated.
In the five years since the companies' last attempt at tying the knot, Alcatel has built a technology advantage.
Meanwhile, Lucent has struggled financially. It's a leading maker of the technology used by several major carriers including Verizon Wireless, and Sprint Nextel Corp.
In January, Lucent, which was spun off from Ma Bell in 1996, reported a first-quarter loss of 2 cents a share, and pro forma per-share income of 4 cents. Lucent also reported lower revenue, and had previously forecast weaker demand in the U.S. and China.
At the time of the first-quarter results, executives noted that the typical burst of spending among network operators had failed to materialize as customers tightened their belts.
Earlier this month, Lucent shareholders traded the stock down after a skeptical report in Barron's, which is published by MarketWatch's parent company Dow Jones & Co. The article noted that Lucent could face growth problems if consumers don't adopt new wireless services and if big phone companies cut spending on equipment.
In reaction, Lucent may be looking to diversify into "triple-play" services, which combine Internet, television and voice.
In that aspect at least, Alcatel would be a perfect match. In February, the company said its fourth-quarter profit surged, helped by an increased demand for "triple-play" services.
In 2005, Alcatel posted sales of 13.1 billion euros ($15.8 billion), up from 12.2 billion euros in 2004, and net income of 930 million euros, compared with 576 million euros in 2004.
Alcatel is already the world's leading seller of "digital subscriber line," or DSL, equipment, which U.S. phone companies have been buying to expand their broadband businesses.
News of the potential merger comes at a time when the industry's biggest suppliers, which include such companies as Nokia and Motorola, compete for contracts in nearly every corner of the globe.
"SBC is going to have to expand its architecture in the U.S., most of which has been provided by Alcatel. But Alcatel doesn't have the local workforce to do it, Lucent has," said Ovum's Doineau.
Telecom has seen a massive wave of consolidation during the past two years, with the announced value of U.S. deals alone exceeding $200 billion. Most recently, AT&T Inc. announced plans to buy BellSouth Corp. for $67 billion.
Other transactions have included Verizon's acquisition of MCI Inc., and the earlier purchase of AT&T by SBC Communications Inc., which took the AT&T name.
There's already been some consolidation in the equipment sector.
In October, Ericsson of Sweden agreed to acquire most of the assets of Marconi Corp. In February, Cisco Systems completed an acquisition of Scientific-Atlanta, giving it a major beachhead in the cable TV, video-on-demand and emerging Internet television businesses. And Motorola has plans to spend up to $1 billion to buy small companies.
(END) Dow Jones Newswires